Speakers: TCJA Puts New Wrinkles in Transportation Expenses for Exempt Organizations

Chris Gaetano
Published Date:
Feb 26, 2019

Tax-exempt organizations could be a little less tax exempt than they used to be, due to a provision of the Tax Cuts and Jobs Act that changes how the IRS treats transportation benefits. 

Speaking during the Foundation for Accounting Education's Exempt Organizations Conference today, Ethan Kahn, a partner at Mazars USA, said that the new tax law involved changes to what is and is not considered a benefit. During a later session, two other speakers addressed the issue.

A benefit, for tax purposes, is generally held to be something that is given to the employee above and beyond compensation, said Kahn. However, if at least part of that benefit is paid for by the employee, such as health insurance, then it is considered a compensation reduction agreement. 

"What the IRS is saying is we've got to take certain components of a compensation reduction and put [them] in the category of a benefit," said Kahn. 

While this provision was drafted with for-profit entities in mind, he said that it greatly affects not-for-profit organizations as well, particularly with regard to transportation benefits, such as paying for employee parking spots or commuter passes. 

The current regulations on this matter say that unrelated business income taxes (UBIT) of a nonprofit organization shall be increased for any amount in which a deduction is not allowable in a for-profit organization under Sec. 274, and is paid or incurred by this organization. This includes transportation benefits, such as an employer paying for parking spots or public transportation passes. He said that in the case where the transportation expense is paid for post-tax, it's obvious that it's a benefit being paid out by the organization, and therefore is taxable. Yet, he pointed out that the IRS will also count as benefits pre-tax arrangements that appear to be compensation reduction agreements, as the portion the employee paid was not subject to tax. Anything not taxed, he said, is automatically considered a fringe benefit, which then adds to the employer's UBIT liability, because the perception is that this is something the organization is providing the worker. 

"We know their mindset: that the employer portion of transit is definitely being taxed, [so the] employee portion is being taxed, because it's not taxable income and anything not taxable is therefore not income," he said. 

This change is part of an overall project that involves narrowing the gap between how nonprofits and for-profits are treated by the law, according to Kahn. In this respect, he also discussed another area where nonprofits are now being subject to rules similar to those in the for-profit world: executive compensation. The TCJA imposes a 21 percent excise tax on nonprofits that pay compensation of $1 million or more to any of their five highest-paid employees, which applies to all forms of remuneration of a covered employee. (Our coverage of the Jan. 17 Nonprofit Organizations Conference goes into greater detail). 

A speaker at another conference session, Allison Sesso the executive director of the Human Services Council of New York, which advocates for human services-oriented nonprofits, said that these sort of tax increases wouldn't be as problematic if nonprofit organizations were already well-funded and operating under few fiscal constraints. However, this is far from the case for many of the organizations her group represents; Sesso said that many are barely solvent, if they're solvent at all. 

Sharon Stapel, president and executive director of the Nonprofit Coordinating Council of New York, said that these measures caught nonprofit organizations, unused to thinking about the tax implications of their programs, completely by surprise. Most were concentrating on the impact the bill would have on charitable giving instead. 

"We were [thinking], this is a... tax on nonprofits that are already living hand to mouth in many situations; [the IRS is] now asking them to take a third of their money and do something completely unbudgeted," she said. (Prior to the state decoupling its tax code from the federal one, it imposed an additional 9 percent state tax on fringe benefits on top of the 21 percent federal one.) 

The additional tax will make it very difficult for nonprofits to implement their missions, said  Sesso. On top of this, she said, it represents a "fundamental shift" in how people think about what a nonprofit organization is and what it is meant to accomplish. 

Stapel agreed with the sentiment and said that this push for parity is part of a larger effort to shift the definition of what a nonprofit is that she said will threaten the political neutrality of charitable organizations. As another example, she pointed to occasional efforts to repeal the Johnson Amendment, which prohibits 501(c)(3) organizations from endorsing or opposing political candidates. She said that there are a number of politicians who don't like that law because "they want folks speaking from the pulpits and for religious organizations to endorse or oppose candidates." 

This change, if enacted, Stapel said, would "either shift us to a position where we believe we must take positions on political office in order to be viable on getting government grants or having relationships we need to be able to forward our mission work, or it will create this category of (c)(3) that are actually PACs but have (c)(3) status. So when we talk about dark money, that is where the money goes." She noted that 501(c)(4) organizations, which do allow for political advocacy, are heavily regulated, but 501(c)(3)s are not. So the sector would see an explosion of new 501(c)(3) organizations that are effectively less regulated than 501(c)(4)s, crowding out those that are "the ones providing shelter and good and making sure the kids are safe and elderly folks have food and companionship. All the good work that (c)(3)s are doing becomes sort of politicized." 

Stapel said that her own organization does not take government funding in order to preserve its independence, but even then, there is still great pressure to be a political actor already. For instance, state politicians have asked her organization to host fundraisers or let them give a speech to their members. 

"Turning them down when they needed a favor, the only way to do that was to tell them we could lose our (c)(3) status," she said. 

Beyond concerns about funding their mission, another major impact the tax law is currently having on nonprofits is recruitment and retention. Sesso said that nonprofit organizations have already reported to her that they've cut out transit benefits because the tax makes it much too expensive for them. This, she said, is at a time when many are struggling to attract qualified staff who could probably make more money in the private sector. 

"Take that away from people, which is something nonprofits have done, saying they can't afford it anymore, putting all these things in context, it's like a domino effect. So I'm quite worried about this being another thing adding to people saying, 'I really cannot afford to work at this nonprofit anymore,'" she said. 

Stapel said that there is currently an intense effort to get the UBIT provisions repealed, noting that many politicians apparently didn't know how this would affect nonprofit organizations. While it was difficult at first to get enough attention paid to this issue, she said that the situation has changed a lot since the nonprofit sector convinced religious organizations that this affected them too. With this addition, she said, there is a chance Congress can be convinced not only to repeal the measure but to make it retroactive as well. 

"There are some religious organizations that have very big parking lots that are finally understanding what this means for them," she said. 

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